Is the USDHKD carry trade sustainable?

Recently, the HKD funding market has tightened abruptly, sparking widespread discussion about the unwind of USDHKD carry trades. The market generally attributes this to two reasons: first, policy stimulus briefly attracted southbound capital inflows; second, seasonal liquidity strain due to quarter-end timing.Through a statistical analysis of HIBOR historical data from 2022 to 2025, we conclude that: the quarter-end effect is the main driver for the spike in HKD funding rates, which usually shows as "short and sharp" and is most pronounced in the last 2-3 trading days of the month, before quickly falling back to normal ranges after the turn of the month.

1. Historical Validation of the Quarter-End Effect

We extracted the last three trading days of each quarter (March, June, September, December) between 2022 and 2025 as the quarter-end interest rate level for observation, combined with the HIBOR overnight (O/N) rate changes in the three trading days prior to the quarter-end and the first two trading days of the following month, in order to measure the degree and persistence of quarter-end liquidity tightening. Analytical logic:

1. Timing Effect: Statistical analysis shows that in the vast majority of quarter-ends, HIBOR O/N rates experience a significant jump.

2. Persistence: The peak of rate spikes usually occurs on the penultimate or last trading day of the month-end.

3. Speed of Reversal: After entering the first trading day of the new month, rates typically fall sharply and by the second trading day, they return to the average level prior to the month-end.

2. Cross-Validation of Recent Market Tightness

According to the above historical pattern, the current (end of March 2026) market perception of HKD funding tightness is highly consistent with the historical quarter-end effect.

Data shows that even in the absence of special events, endogenous needs such as internal assessments and regulatory target compliance within the banking system at quarter-end are sufficient to cause significant rate spikes. The HIBOR O/N, 1W, and 1M data in the table below all display a clear "quarter-end spike, post-month reversal" pattern, verifying the short-term nature of quarter-end liquidity tightness.

In addition, considering the upcoming Easter holiday in Hong Kong,the author selected periods from 2021 to 2025 during which the Hong Kong market was closed for 4 or more consecutive days (including weekends),and analyzed changes in HIBOR O/N rates for the three trading days before and the first trading day after the holiday. Statistical results show that HIBOR rates tend to spike before the Chinese New Year (especially when the holiday lasts 5 days) and before Christmas, whereas Easter holidays have little effect on HKD liquidity. Therefore, quarter-end disturbances remain the main reason for this round of funding tightening.

3. Conclusion and Market Implications

Quarter-end effect is the main contradiction: Historical data clearly shows there is a notable pattern of spiking HKD funding rates at quarter-ends, especially at half-year and year ends. This round of funding tightness is a typical "quarter-end effect," rather than a structural imbalance.

Duration is short: This effect usually only lasts 2-3 trading days. After the month-end, as liquidity in the banking system returns to normal, funding rates will rapidly drop back. It is expected that in April, HIBOR rates at all tenors will decline substantially and the carry trade environment for USDHKD will improve accordingly.

Trading strategy implications: At quarter-end, traders should make early arrangements for liquidity management, being alert to sharp exchange rate volatility brought by sudden tightening of funding. Meanwhile, with the US-Iran situation remaining uncertain and FX trading directions hard to grasp, as long as HKD funding does not further or persistently tighten, USDHKD carry trades can still be considered as a medium-term strategy.